Ballard Spahr LLP

The FTC announced settlements of two lawsuits filed in a California federal district court alleging similar violations of the FTC Act, the Telemarketing Sales Rule (TSR), and the Truth in Lending Act by providers of student debt relief services, their principals, and a Minnesota-based company that provided financing to customers of the providers involved in both complaints.  One of the complaints was filed jointly by the FTC and the Minnesota Attorney General and included claims alleging violations of various Minnesota statutes, including the Minnesota Uniform Deceptive Trade Practices Act.

The lawsuits alleged that the debt relief companies charged illegal upfront fees that they led consumers to believe went towards payment of student loans, and falsely promised that their services would permanently lower loan payments or result in forgiveness of loan balances.  They also alleged that the debt relief companies had entered into arrangements with the financing company defendant pursuant to which the financing company would extend credit to qualified consumers to pay the debt relief companies’ fees.  The financing company allegedly ignored red flags in the form of direct complaints from consumers and complaints forwarded by the Better Business Bureau and CFPB that the debt relief companies had engaged in misleading sales tactics and consumers had not authorized the loans they received from the financing company.  The lawsuits alleged that the financing company violated the TILA by failing to provide required disclosures in connection with the loans and violated the TSR by providing substantial assistance or support to the debt relief companies which it knew, or consciously avoiding knowing, were engaged in deceptive and abusive telemarketing practices in violation of the TSR.

In one of the lawsuits, all of the defendants have agreed to entry of stipulated orders.  In the second lawsuit, only the financing company has agreed to settle the case.  In the fully-settled case, the settlement imposes a $4.2 million judgment on the student debt relief company and its principals which, except for $156,000, is suspended based on inability to pay.  The settlement also permanently bans the defendants from selling any kind of debt relief products or services, making unsubstantiated claims about financial products and services, and making material misrepresentations about any other kind of product or service.  The settlements with the financing company require it to pay judgments of approximately $28 million which, except for $1 million, are suspended based on inability to pay, bar it from collecting any amounts owed on loans made to customers of the debt relief companies, and permanently ban it from financing the purchase of debt relief services.

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